Jan Sternin On How Data Standards Could Have Helped Prevent A Crisis

PERSON OF THE WEEK: MortgageOrb caught up with Jan Sternin, managing director at the Situs Cos., a provider of global commercial real estate services and consulting solutions. Sternin is also a familiar figure to anyone who has attended Mortgage Bankers Association (MBA) events. Her 25 years of industry experience include serving as senior vice president of commercial and multifamily for the MBA and CEO of MISMO, the MBA's technology initiative for creating uniform data standards for the real estate finance community.

Q: How are commercial servicers (particularly special servicers) coping with increased challenges and complications related to troubled loans? How have they adapted to meet these changing needs?

Jan Sternin: I can only speak for Situs; we have doubled the number of assets in special servicing.Â

We anticipated a dramatic increase in volume and have managed through the increase by utilizing the team structure to allow backfilling at a less-senior level and by utilizing our technology, which allows us to focus resources on the ‘to think’ functions and not the ‘to do’ functions. We also continue to increase our staff.Â

Q: Many commercial loan modifications have been extremely difficult, given the complicated debt layers. In your asset management practice, how common are modifications?

Sternin: Each loan requested is evaluated on an individual basis. Modification requirements and limitations are defined by the loan and transaction documents. In situations where a modification is within those defined guidelines and provides the best outcome for the investor, we make every effort to effectuate the modification.Â

We are aware that within the commercial mortgage-backed securities (CMBS) framework, there are structural limitations related to the modification flexibility for performing loans.Â

Q: In your due-diligence/loan underwriting business, how have your standards changed over the past year or so? Is underwriting still as stringent as it became when the credit crunch hit?

Sternin: Standards have definitely changed over the past several years. No longer are investors as willing to listen to the lease-up/pro-forma story. Lenders today are most focused on tenant stability and the competitive locational and physical advantages that a property may or may not have in its specific market – in other words, the identifiable uniqueness of the property.

As we have witnessed through several real estate circles, the better located and maintained properties have generally been able to sustain rental rates and occupancy during tenant turnover.

Underwriting standards over the past year have remained fairly consistent. Pricing appears to have tightened a little, as the perception of stability is more common today.

Q: How much more do you predict property values will drop?

Sternin: Values have generally declined 25% to 50%, depending on the asset class and location. In many cases, land value has decreased more. The reality is that we do not expect a lot more decline through the remainder of this year.

Generally, values have been relatively flat for the last nine months. However, with a lack of transaction activity, and the fact that most property owners and lenders were not in a position to accept current values, the perception has been that values were still declining.

Market fundamentals will undoubtedly continue to erode for certain assets and specific regions of the U.S., but wholesale declines are not anticipated for the near term.

I think it is safe to say that many of the ‘smile states’ (Florida, Georgia, Nevada, Arizona and California) have experienced some of the biggest declines in values and corresponding foreclosures, with the exception of Texas, which has weathered the storm better than most, due to the diverse economy and specific support from the energy sector.

Florida, Arizona, Georgia and California are clearly at or nearly at the bottom, on a relative basis. New York, Chicago, Los Angeles and some of the other major metro areas will likely see more declines, but these will be directly tied to specifics around their respective employment bases and the corresponding erosion of market demand for specific property types, such as office and retail.

Regarding those markets that are expected to recover first, there is a distinct link between market recovery and the stabilization of the single-family housing market. New York and Chicago have not yet experienced housing-price stabilization, but it is important to note that although their markets inflated during the boom, they never reached the astronomic growth experienced by states such as Nevada, Florida and California.Â Â

Florida is already seeing signs of increased transaction activity. Additionally, Florida, Nevada, North Carolina and Arizona will likely remain strong attractors of retirees, who drive a significant percentage of property demand. Although many empty-nesters may be pushing off their retirement for a few more years, their plans haven't changed to head south once that time does come.

Additionally, the reset in values in these states have again made them more affordable to the general population. California, on the other hand, has significant governmental issues, and the overall costs of living in the state will be a big challenge to new and expanding businesses and in their ability to attract retirees.Â Â Â Â Â Â Â Â

Q: Finally, given your background with MISMO, what do you foresee for data standards and information-flow improvement in CRE finance? What are the current hurdles?

Sternin: Data standards could be as important to the commercial real estate lending space as renewable energy is to our country. Without data standards, achieving the level transparency that our capital markets and the regulatory community now require, will be almost impossible.

The commercial real estate and lending space have been dinosaurs with regard to their investment in technology. The residential sector, on the other hand, has been much more willing to invest in technology, due to the overall efficiencies that can be and have been gained through these investments.

A lack of wide adoption of uniform data standards, in concert with the standard reporting package developed for CMBS, limited the level of data transparency that could have helped mitigate the level of credit risk that resulted in the financial meltdown.

Unfortunately, efforts such as MISMO have been challenged due to budgetary cuts and the fact that MISMO is a trade association-driven effort, which requires a much greater consensus in the development process in order to address the different stakeholders' interest.

On the other hand, companies such as CJC Technologies – the developer of CLOSER, a loan origination, underwriting and asset management software application – have taken the issue of data standards and flow process integration to the next level by developing unique xml data schemas that they are now sharing with legal document companies, third-party vendors, market data sources, mortgage loan servicing systems and, ultimately, investors.Â Â

In my opinion, the biggest hurdle facing widespread adoption of data standards is the lack of information that business leaders have regarding the tools that are already available in the marketplace to facilitate workflow and credit risk analytics. In many situations, efforts around better technology gets lost in internal IT departments and has not been elevated to the business departments.

Furthermore, as we have seen in our own company, internal IT wants to build proprietary systems and/or has not been put in a position to learn about industry-specific built products that can deliver economical viable alternatives to internal development.

The most likely way that data standards are to be developed in the short term is by private-sector companies working together to connect workflow processes that innately provide enhanced efficiency, data transparency and credit risk analytics.Â Â Â